Bayer CEO Says Breakup Wouldn’t Fix All of the Company’s Ills

A stream of negative news has rekindled calls from investors for Bayer to unlock value by spinning off its units into separate businesses. But in an interview with The Wall Street Journal this week, Anderson said the company couldn’t be distracted from the tough restructuring to fix the businesses.

“If we don’t have the most agile and responsive approach to product development, customer proximity and how we run our businesses, breaking [the company] into pieces isn’t going to solve things,” he said. “No structural options are going to make up for lack of great execution.”

Over the past week, the German company canceled a clinical trial for a drug it had hoped would underpin future profit. Bayer, whose products include aspirin and the Roundup weedkiller, was also ordered by a Missouri court to pay $1.56 billion to four plaintiffs who claimed Roundup caused their cancer—a decision the company is appealing.

The court decision reminded investors that Bayer still faced unquantifiable liabilities stemming from its 2018 acquisition of Monsanto. And the abandoned clinical trial dashed hopes Bayer had found a successor to lucrative drugs whose patents are expiring soon.

The combined news sent Bayer shares tumbling on Monday. By the end of the week, Bayer’s market capitalization fell 8.7 billion euros, equivalent to $9.5 billion, to €32 billion, lower than the company’s net debt of €38.7 billion at the end of third quarter. Bayer shares have lost 21% of their value since last Friday’s close.

The company reported a net loss of €4.57 billion for the third quarter on losses in its crop-science business and declining sales and earnings in pharmaceuticals.

Anderson, who became CEO in June, has been tasked to clean up his predecessor’s disastrous Monsanto acquisition and re-energize Bayer’s pharma-to-consumer businesses.

After joining Bayer, the Texas native appointed a team of experts including investment bankers to map out potential breakup scenarios. In October, he said the company had ruled out a three-way split and promised more clarity early next year.

Anderson said in this week’s Journal interview that the recent troubles didn’t require him to rethink his strategy for transforming the company, adding that more work had to be done before any breakup could be considered.

The CEO is pressing to thin out Bayer’s bloated bureaucracy to put more decision-making power into the hands of individual managers running teams and businesses, a change that he said would give them a sense of ownership and accelerate product innovation.

“We want to rapidly bring this new system into place,” Anderson said. “But in the meantime we continue to have a close dialogue with our shareholders about the different options.”

The team studying strategic options is looking at how spinning off some operations would affect the company, Anderson said. They need to review how the company’s leverage and financial flexibility would be altered, he added, saying any change couldn’t come at the expense of operational performance.

Bayer has three core business: pharmaceuticals, crop science and consumer health, which deals with nonprescription over-the-counter drugs, such as aspirin, which the company began making in 1899 and is now one of the most common household medicines.

Investors who have called for a breakup, such as Bluebell Capital, argue that Bayer’s share price suffers from a conglomerate discount—that the individual parts of the company are more valuable separately than the sum of the parts as a whole. Separate companies, they argue, would also be more focused and able to make faster decisions.

Charlie Bentley, analyst for the brokerage Jefferies, wrote in a recent note that “if all options are on the table, it’s time to carve up.” He said the failure of recent drug trials leaves Bayer facing a “patent cliff” where its current product Xarelto, a blood thinner, is due to expire. “This setback increases challenges facing the new CEO,” he said in a note this week.

Bayer’s pharmaceutical business generated €13.5 billion in sales and €3.8 billion in profit during the first nine months of this year. This week’s announcement that Bayer was halting late-stage trials of asundexian, an experimental anticoagulant designed to prevent strokes in risk patients, leaves the company’s drug pipeline looking dangerously empty.

Anderson said the decision was “not a shock from the standpoint that this could happen. … I think what it does is it puts more emphasis on the importance of our early pipeline efforts and some of the late-stage trials that are ongoing.”

Analysts estimate that the failed drug could have generated as much as €5 billion in revenue.

“This really increases the pressure on Anderson to strengthen the pipeline, and that is going to be difficult to do organically. They will need to make acquisitions,” said Markus Manns, a senior portfolio manager at Union Investment, a German investment fund.

One problem is that Bayer’s acquisition of Monsanto for $63 billion in 2018 left the company saddled with debt, restricting its ability to make acquisitions.

Another is the legal baggage the deal brought with it, which leaves Bayer facing hard-to-compute costs in the future.

Anderson’s predecessor, Werner Baumann, launched a bid for Monsanto just 10 days after becoming CEO. Baumann had expected that a combination of Bayer’s agrochemical business—known for its strength in pesticides—with Monsanto’s seeds business would create a global juggernaut.

Yet within weeks of the deal’s completion, Monsanto, now owned by Bayer, lost a lawsuit by a consumer who claimed that glyphosate, the main ingredient in Monsanto’s Roundup weedkiller, had caused his cancer. Bayer was ordered to pay $289.2 million in damages, an amount later reduced on appeal.

During an analyst call this week, Bayer said it had settled 113,000 glyphosate cases in the U.S. from an original list of 165,000. The company says it currently faces about 50,000 cases and plans to litigate each one if necessary.

After winning a series of cases, Bayer has lost the past four lawsuits in a row, raising the stakes as the company continues to fight back. Bayer said that on appeal the company’s lawyers have been able to reduce awards by 90%.

“We’re going to continue to vigorously defend ourselves. We believe wholeheartedly in the importance of glyphosate and the safety of glyphosate when used as advised,” Anderson told the Journal.

Write to William Boston at [email protected]

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